Fund managers are already encouraging 'risk-on' attitudes after markets plunged in August, but allocators argue 'not so fast'.
For John O’Toole, head of multi-asset portfolio management at Pioneer Investments, a key task is to ensure his target managers can limit drawdowns and diversify risks for end-clients. Partly in this regard, he notes: “What would help me hugely would be to find more absolute return managers that actually achieve absolute returns.”
O’Toole and his team oversee €30bn in a broad array of multi-asset products including funds of funds, with goals from absolute return to asymmetric rewards, capital guaranteed and balanced. With such a range, they are not seeking just one uniform asset class, or manager style.
In terms of allocations, O’Toole mentions being generally underweight exposure to peripheral Europe, a preference for relative value positions rather than aggressive directional bets, and a “preference for all EM over developed markets”. Within developed markets O’Toole’s preference is for US exposure over European.
His clients are far more sensitive to losing money than capturing all upside, he says, making diversifying risks a key task in his portfolio construction – “avoiding having too much exposure to any one risk. We are not seeking to take big allocation bets in pure fund selection portfolios, but rather want to extract alpha over time.
“We try to diversify our ideas – it is ultimately the only way to protect your client. We are trying to get differentiated views into our portfolios. You build track records by not making big drawdowns, but there is still an idea that if a manager loses 20% in a year the market falls further, that is successful.”
O’Toole’s team manages portfolios as a combination of core allocations, and satellite strategies which are not highly correlated to the core. In addition, fund selection strategies are used to implement the core allocations, while derivatives are employed to manage overall positioning more dynamically.
“Rather than just sitting back and soaking up whatever the market has to throw at us, we have become more dynamic in this regard.” For example, O’Toole’s team
bought volatility when the Vix index was calmer, at 14, in February. By mid-August, it hit 47 after a 50% one-day jump. O’Toole is considering taking profits and rolling into further protection.
Such hedges allow Pioneer to remain, to an extent, in risk asset funds in difficult markets. “If markets rise, you forfeit a bit [on the protection], but you still have structural long equity exposure. So, it is a small insurance premium against environments like today’s. It enhances flexibility and improves clients’ risk/reward pay-off.”
As markets vacillate between seizing and avoiding risk, this willingness to hedge directly at Pioneer is shared by an increasing number of its peers, showing willingness by allocators to be more active managers themselves and
accept similarly active approaches at fund level.